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Philip Miller

What is the impact of BoE decisions on the pound?

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Hi, I'm quite new to trading so I'm wondering what's the impact of today's Bank of England decision on the pound and Forex market, in general?

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Hi Philip, and thanks for the question. As you may imagine, the decisions of the BoE have a paramount impact on the markets in general, and the pound/FTSE100 in specific. Any move and changes on the monetary policy front are likely to facilitate big moves in equities and the pound.
 

For instance, the sterling gained 100 pips following today’s BoE announcement that it is increasing the amount of government bonds it plans to purchase. However, those gains were quickly erased following Governor Bailey’s press conference. Hence, I always advise trading these high-impact events with caution as the price action tends to whip around until the dust settles.

 


 

Edited by James Byrnes

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Hi Phillip, thanks for coming here. 

In general, decisions of the Bank of England (BoE) have a profound impact on the sterling and price developments in the currency market in general. Let me illustrate this relationship in a simple example. 

Two days ago, the BoE held a regular monthly meeting to discuss the recent economic developments and the impact on the COVID-19 crisis on monetary politics. The BoE decided to increase the quantitative easing (QE) program by an additional £100 billion, increasing the overall value of the program to £300 billion. The total stock of asset purchases is now £745 billion. The BoE also decided against moving into the negative territory with interest rates to keep the base interest rate at 0.1%.

"Sterling sold off before and after yesterday's BOE announcement and, judging by the questions we received on it during the afternoon, we weren't alone in being surprised at the extent of the sell-off. Ourselves, we saw mainly real money buying on the way down but clearly there was a flow-driven element to the move; the BOE decision itself provided little explanation," JPMorgan's analysts wrote in a note. 

The pound moved lower before and after the BoE announcement, which means that these high-impact events almost always bring higher volatility. In some cases, moves in the currency market can't be explained as investors tend to process the latest information received from the BoE. All in all, the BOE-related events almost always bring fun to the markets. An advise that I can give to novice traders is to stay away from the high-impact events as they bring higher volatility. 

Technically, the pound broke below the critical support in the short-term following the BoE meeting on Thursday, 19 June. This break can facilitate lower levels in the coming week with $1.2270 the next target for the sellers. 

I hope you found my answer hopeful.

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